The up to date outlook marks a departure from Scotiabank’s long-standing view that the BoC had already reached its terminal fee and would stay on maintain at 2.75% all through its forecast horizon.

In a brand new report, Scotiabank’s economists say the outlook for development is dimming shortly, thanks largely to a “dramatic escalation of America’s struggle on commerce.”

Whereas Canada has prevented the steepest tariffs up to now, the spillover from weaker U.S. development and softer commodity costs is already being felt.

Financial dangers are rising on each side of the border

Within the U.S., Scotiabank says 100-year-high tariffs are “already inflicting a fabric slowdown in financial exercise that may lengthen nicely into subsequent yr.”

And whereas tariffs towards Canadian items haven’t modified a lot since March, the financial harm elsewhere is weighing closely.

“We now forecast the Federal Reserve will maintain its coverage fee on the present degree by way of the rest of the yr given the inflationary penalties of its tariff coverage,” the report says. “The Bank of Canada is at present forecast to maintain its fee at 2.75% for the rest of the yr, however that evaluation could change as we see how inflation and development evolve in coming months.”

Whereas a full-blown recession isn’t Scotiabank’s base case—in contrast to others like Oxford Economics—it admits it’s a detailed name.

“There isn’t a doubt that economies will flirt with recession owing to the tariffs and related uncertainty,” the economists warn.

For Canada, they now forecast GDP development slowing to only 0.7% in 2026, with the unemployment fee rising to 7.2% because the financial system struggles to regain momentum.

BoC cuts on the horizon—however not till 2026, Scotiabank says

With slower development on the way in which, Scotiabank says it now expects the Financial institution of Canada to begin chopping rates of interest subsequent yr.

“We assume that Governor Macklem retains charges unchanged for the rest of the yr, however this relies critically on the evolution of the worldwide commerce struggle, the magnitude of the decline in U.S. financial exercise, and the Canadian authorities’s response to it,” the crew stated.

“If the U.S. or Canadian economies weaken greater than anticipated, the BoC would probably decrease charges,” they added.

Underneath their base case, the Financial institution of Canada would decrease its coverage fee by a complete of 75 foundation factors in 2026, serving to to help a still-fragile restoration.

That places Scotiabank at odds with most different main banks, together with BMO, TD and CIBC, which count on the central financial institution to proceed chopping charges this yr earlier than transferring to the sidelines for the foreseeable future.

Whereas National Bank and RBC additionally count on two to 3 quarter-point fee cuts in 2025, they each count on the Financial institution of Canada to hike a couple of times in 2026 as financial circumstances enhance.